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TraderSavvy Newsletter for Futures Traders
In This Issue:

Donna Heidkamp discusses how you can improve your odds of trading success by learning how to read a Commitment of Traders Report.

August 16th, 2007 TraderSavvy.com   |   Read Past Issues
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How to Read a Commitment of Traders Report

Many people rely on both technical and fundamental information to formulate market opinions.  To trade successfully, we try to make an educated decision to buy and sell the market in a timely fashion.  Even if the fundamental information is bullish or bearish, how do you know that the timing to make the trade is right to initiate a position or liquidate a position?  Studying the weekly Commitment of Traders (COT) report can improve your odds of success by giving you a better handle on who is driving a market. 

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Market participants are typically broken down into small speculative traders, large speculative traders (funds), and commercial hedge traders.  Each exchange submits a commitment of traders report weekly with the total long and short positions for each group.  This information could be useful if used in conjunction with technical analysis to improve your timing of entering and exiting the market.  For example, if the funds and small specs both hold a record net long position, the market will likely experience profit taking and reverse at some time. However, it is important to keep in mind the old saying that “records are meant to be broken!”

If you are a novice trader, you might not fully appreciate the value of tracking open interest, or what exactly open interest is.  According to Investopedia.com, open interest is defined as “the total number of options and/or futures contracts that are not closed or delivered on a particular day.”  The most bullish market scenario includes an environment of increasing open interest, increasing volume, and increasing price.  This holds true for a bearish market scenario as well—except we are looking for a decreasing price. 

How do we track who the market participants are?  The U.S. Commodity Futures Trading Commission (CFTC) developed the system of reporting known as the COT report. The report started out many years ago, being released on a monthly basis.  Over the years, the CFTC has become more efficient at accumulating the data and now releases the numbers every Friday at 3:30 p.m., based on the close of business from Tuesday of that week.  As a result of the increased efficiency of reporting, the report has become regarded as a more important piece of the puzzle—to track for a clue to market direction.

Just as the markets continue to evolve, the report has also continued to adapt to market changes over the years.  The report is intended to level the playing field between large traders and small traders, by making the public aware of who is playing.  As the report evolves to adapt to market changes, it is equally important that it does not put any traders at a disadvantage in the marketplace.

The report breaks down the total open interest into categories including large speculative, commercial, and small speculative.  Large speculative traders are considered to be fund traders that add liquidity to the market, and trade using both long and short positions.  Commercial positions used to be primarily pure hedgers in the market.  An increase in commercial positions used to be a strong indication of demand for physical commodities on the cash market.  Non-traditional commercial traders, also known as long only index funds, have increased over the years.  (Not all long only index funds fall under the commercial category.  Some fall under the large speculative category, depending on the initial registration with the CFTC.)  Therefore, when evaluating the commercial traders’ net position, it is no longer clear what the true hedge commercials are holding versus the long only index funds that are registered as commercials.  The CFTC has res ponded by starting a COT supplement report that breaks down the positions held by traditional commercials and non-traditional commercials for twelve agricultural markets.  (The supplement report is being released as a trial through December 2008, to make sure it does not disadvantage any traders.)  The third group consists of small speculative traders, whose primary purpose is to add liquidity to the marketplace.  The small speculative trader is the only category that is non-reportable to the exchange.  Therefore, the number and percentage of market share that these traders maintain is not available. 

The reports are broken down into Futures Only or Futures & Options combined net position.  Both reports are offered in both a long and short format, as well.  The long report provides the same information as the short report, but also has the percent of market share that the top four and top eight traders hold in the market.  Below is an example of the COT report for futures only positions in the wheat market.  Weekly updated information can be found by visiting the following link:

 http://www.cftc.gov/marketreports/commitmentsoftraders/index.htm.

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About Today's Author:

Donna Heidkamp

"My interest in the futures industry stems from strong family ties to production agriculture in Hereford, Texas. After completing a bachelor's degree in Agricultural Economics at Texas Tech University in 1995, I moved to Chicago to participate in the Chicago Mercantile Exchange Agricultural Broker Training Program. The program exposed me to all facets of the futures industry, enabling me to work with experienced floor traders and develop a strong understanding of the intricacies of trading in the futures markets.

Since completing the training program in 1995, I have continued to gain a well-rounded knowledge of the industry by working as an order clerk, trading desk manager, and broker for RJOFutures. In 2004, I started a branch office of RJOFutures to focus my efforts on helping clients meet their trading goals. By identifying client objectives, managing risk, and providing a carefully tailored service, I serve as a dedicated liaison on all trading floors to full-service, broker assist, and on-line clients.

In order to continue to better serve my customers in an ever-evolving and dynamic industry, I also completed a M.S. degree in Financial Markets and Trading from the Illinois Institute of Technology in May of 1999. "